Monday, December 27, 2010

Two and half years ago Silvio Berlusconi proudly announced that the refuse emergency in Naples was over, contributing to his huge popularity in 2008. The Prodi government had struggled to resolve the problem sufficiently quickly and Berlusconi's successful election campaign made much of his promises to clean up Naples, using his entrepreneurial drive and mafia connections famed ability to get things done. Indeed, the piles of rubbish in the streets of Naples were removed, or at least most of them.

Now, at the end of 2010 and halfway through another triumphal Berlusconi mandate, the rubbish is back. The old man is clearly starting to teeter, as is indicated by his desperate narrow escape in a motion of censure last week. Allies are beginning to take their distances and his popularity - although indescribably high for most foreign observers - is on the slide. It can only be a matter of time now, especially since Berlusconi's 74 year old body is finding it hard to keep up with the pace of events - much has been made of his recent tendency (signalled by Wikileaks dispatches) to fall asleep at inopportune moments.

What's next? It's very hard to know, since the main opposition, the PD, is doing just as badly in the polls. Only the populist Northern League is gaining from Berlusconi's decline, and they can't be expected to take a central role in forming a government. My guess is that there could be another big game of musical chairs on the Italian right about to start.

In any case, Berlusconi's resignation (preferably in handcuffs, but let's not overdo it) is high on my wishlist for 2011. Along with Hull City's return to the Premiership, a split in the Lib Dems, serious financial reregulation, the orderly separation of the peripheral Eurozone from the core, the rerouting of the Piccadilly Line through Crouch End, the abolition of mortgage interest relief for landlords, 20 mph speed limits everywhere in London, the restoration of the Net Book Agreement, and the cancellation of the Royal Wedding.

On the one hand, people seem relaxed about high incomes if they are 'deserved' because of hard effort or particular talent. And on the other people are often very critical of the poor if they are heavily dependent on benefits. All of this sounds pretty bad for redistribution.

However, there are some interesting caveats to this conclusion. First, respondents in the JRF research had an interesting view on what constituted a 'deserved' high income. In fact, when asked whether earnings of £150,000 were in most cases 'a fair reflection' of an individual's contribution only 28% of respondents agreed, whilst around 50% felt this was not true in most cases. This suggests many people are unaware that £150,000 is a fairly standard remuneration for high status jobs in finance, business, the law and medicine (especially in London), rather than the kind of figure mostly reserved for successful entrepreneurs or football players. Interestingly, just short of half of respondents felt £150,000 was not a morally justifiable salary, since anyone should be able to get by with less.

Second, respondents were more willing to support welfare benefits if they were more available to people on average incomes rather than being simply targeted at the very poor. There was broad support for progressive policies on tax and welfare, but resentment at those who appeared to be playing the system and not taking opportunities for work.

Finally, even though a representative sample was taken with respondents from all income groups, the vast majority regarded themselves as being in the middle of the income distribution. People seem to have no sense of where they lie in the economic hierarchy. This point is confirmed by other research, revealing widespread ignorance of what particular professions usually earn, almost always underestimating the average salaries in professional jobs. The reason for this is most likely because people know the kinds of salaries earned by people they know, and most of the time this means salaries in a similar ballpark to theirs. Therefore, middle income voters don't know that much about how much the rich make, or for that matter the poor.

This has all kinds of implications. First, a useful corrective to the Meltzer/Richard model - if median voters don't know what the income distribution is, they can't correctly estimate their net benefits from redistribution. Ironically, in a very divided society median voters may be even more ignorant about the distribution, and therefore less capable of perceiving the worth to them of redistributive policies. This could offer some insight into why the model is less successful in explaining preferences in unequal societies than in more equal ones.

Secondly, it has implications for social democratic strategy. In particular, Labour should set about making the welfare state more universalistic, to the extent that it can. The current arrangements leave the median voter pretty much out of the welfare net, but very often average earners perceive welfare recipients as relatively advantaged despite their workless status. In fact, in high cost areas people can be better off not working, and that is clearly a policy designed to irritate median voters.

Of course, this is not easy when there is no money around. But there are good reasons for reducing welfare targeting, not the least of which is people's increased willingness to pay for benefits when they think they might receive some. Increased tuition fees and removing child benefit from high-rate taxpayers move in the opposite direction - Labour could regain some popularity by promising to reverse them.

Thursday, December 16, 2010

Neat review post by Edward Glaeser assessing the evidence. He finds it inconclusive, but largely because he seems to be focusing on deltas rather than absolutes - it's true that increases in inequality prior to the crash were not that stark, and that the link between reckless borrowing and increases in inequality is not robust.

However, the biggest financial collapses were in countries with high inequality: US, UK, Ireland, Greece, Spain... whilst egalitarian Sweden is doing OK. Of course, there may not be a direct causal link - it could just as easily be that inequality and financial recklessness are both the result of something else: like an obsession with market liberalism, for example.

Incidentally, this seems to be a problem with the economists' preference for fixed-effects models. The stable cross-national differences that seem to account for outcomes end up getting missed.

I have no problem with Cowen's analysis of the risks of financialization, which allows a small minority to become super-rich by making leveraged bets whose downside is covered by... well, the rest of us. This is the 'inequality that matters'. I am puzzled by his resigned conclusion that there is not much we can do about it - after all, if governments could save the world financial system from meltdown through unorthodox measures this suggests there might be some levers of power the state still retains. But the way this analysis links inequality to economic failure is compelling.

I'm less convinced by the rest of the article, which argues that we should be relaxed about the other dimensions of inequality. Cowen seems to think that rising inequality is - outside the financial sector - basically the result of globalization and new technologies allowing the talented greater scope to exploit their abilities to make money. And the talented can be anybody. And middle and lower income Americans don't mind if people have worked hard to earn their money. And anyway, it's only really the top 1% that are getting so much richer, for the other 99% everything is pretty much stable. To illustrate the point, Tyler Cowen is getting along fine, despite the fact that he doesn't have as much money as Bill Gates.

I think there is an important point in there, but a lot of complacency too. The important point is that people don't develop political views about the justness of income distribution by calculating Gini coefficients and looking at national or international income distribution data. The result is that people actually don't know quite how much they are being fleeced, and therefore can't be counted on to react with outrage if Gini coefficients get higher. This is true - there is a good deal of evidence that people are likely to think that they are in the middle of the income distribution even if they are not, and to underestimate the incomes of people in the top portion of the distribution. To that extent, understanding political reactions to inequality requires us to understand how people experience it, in their various locations, social cultural circles and occupations.

The rest of the argument is less insightful. How much of the accumulation of vast wealth at the top is due to talent having its day? Well, social mobility is in decline in the US, for a start, so the people making out like bandits are increasingly likely to be heirs to other successful people (Bill Gates is a good example of this). So if 'talent' gets inherited, that seems less reason to accept it as a justification of great wealth.

The other point Cowen seems to miss (despite presenting some numbers precisely on this point) is that if the rich are getting a bigger share of the pie, then everyone else must be getting a smaller share. And this does matter, if people are working hard to grow their slice of the pie and finding that most of this growth goes to a small group of already satiated people. Now, of course Americans are richer than a century ago, and even the poor are well off compared to their ancestors, but still: how happy can people really be about the fruits of their effort being denied to them?

Maybe Cowen is right, and Americans really don't care. But if he is right, you've got to wonder why the angry party seems to be doing so well.

Tuesday, December 14, 2010

I've spent a lot of time recently pondering the Meltzer/Richard model, which (correctly over time, but inaccurately across space) predicts that competitive elections will lead to redistribution because redistribution benefits the median voter. Democracy is associated with a steady growth in the size of the state - and hence the extent of redistribution - over time, but a secondary prediction of the model - that more unequal societies would demand more redistribution - turns out to be flatly wrong. Unequal countries, such as the US, actually seem to resist greater redistribution, even though the logic of the M/R model should push them to demand it.

US voters challenge the logic of the Meltzer/Richard model by supporting policies - such as the Bush tax cuts - which largely reward very rich taxpayers and penalize middle income groups, who end up with fewer public goods in return for a meagre tax break. More recently, the blogosphere has been alive with liberal Americans wondering why, in the midst of a desperate economic slowdown, the hard-pressed median voter supports candidates who long to reimpose the Gold standard and cut government spending.

But Jeff Frankel has inadvertently provided an answer to the conundrum. In his blog he outlines the various ways in which Republicans have talked the talk of balancing budgets and securing price stability, whilst opening gaping budget deficits and bullying central bankers to unleash demand whenever they get the chance. Eureka! Maybe American voters have understood something liberal commentators assume to be beyond them - that Republican talk of responsible economic policy is pure bull****. By voting for balanced budgets and an end to quantitative easing, Joe the Plumber understands that what he'll get is actually the biggest deficit since Bush I and red-hot printing presses down at the Fed.

OK, that does leave the irrationality of opting for the least stimulating kind of deficit and allowing the rich to bail out of social solidarity altogether, but... give me time, I'm still working on trying to rationalize that one.

Monday, December 13, 2010

In case you were wondering what to think about Julian Assange's arrest and likely extradition to Sweden, Naomi Wolf has a pretty compelling analysis here. Wolf's argument rests on the indisputable point that rapists are rarely prosecuted even when the evidence against them is far more damning than in this case, and that the only plausible explanation of the rush to extradite is that Assange has mortally offended the most powerful government on earth.

Of course, if Assange is guilty he should face the full weight of the law. Pity that this principle is rarely, if ever, taken quite so seriously by the courts.

Friday, December 10, 2010

You do wonder though exactly how people are supposed to respond to what's happening. After all, we just had an election, and certain politicians 'pledged' not to increase fees, and after the election, decided to increase them threefold. This is stretching the 'trusteeship' idea of political representation a bit too far, especially since we all knew how big the deficit was by the middle of last year.

Are students expected to pay up and wait to have their say in four and a half years time? And hope that next time they won't have voted for a con artist?

One thing is certain anyway - there will be no hurry to enact the 'recall' reform the Lib Dems were banging on about before the election. The last parliament may have fiddled expenses, but it was a good deal more honest about the real business of politics than this one.

Thursday, December 9, 2010

Interesting take on the crisis of the left by John McTernan - essentially voters perceive that, in his words, 'voters are moving beyond the claim that 'you're all the same', to an absolute certainty that nothing could make things better'.

This may be a key point. After all, the left is about changing things, and most of the big institutional, intellectual and structural changes of the past quarter century have made it much harder for the left to do that. There is a certain helplessness about left discourse - things are terrible, but there's not an awful lot we can do except alleviate some of the worst effects. Clearly not the kind of thing that will inspire confidence, which is necessary for any left administration which wants to make any real changes.

This is an intellectual crisis and a crisis of democratic politics. Intellectual, because the left is losing its ability to diagnose problems and its sense of purpose in dealing with them. Democratic, because people are losing faith in the political process as a way of making our lives better.

Wednesday, December 8, 2010

I guess it was inevitable, but the new Republican-dominated Congress and the Republican-fearing President have decided to deal with the failures of fiscal stimulus by extending the Bush tax cuts. My usual sources of analysis on these things - Krugman, DeLong, The Baseline Scenario - are tearing their hair out over this.

In short, the Republicans talk tough on the deficit and criticize TARP and the stimulus, and then as soon as they can pass a $800 billion tax cut, mostly for the very rich who got most of the benefit of the TARP anyway. They'll either save this money or, worse, use it for leveraged bets in the still-unreformed financial markets. God help us.

Anyway, at least any pretence that American conservatives are really bothered about the deficit as such, rather than using it as an excuse to push their nihilist agenda, has now been dropped so we know where we stand. There is genuine class war going on here - is there no limit to the American voter's willingness to redistribute to the rich?

Monday, December 6, 2010

Zapatero was always over-rated. But by invoking a state of emergency (estado de alarma), for the first time since the democratic constitution passed in 1978, over an ATC strike of all things, he's really lost any shred of credibility. Que desastre.

Friday, December 3, 2010

Spanish air traffic control is currently in the hands of the military and most of the air space shut after the AENA employees walked out.

In case anyone had any illusions that people will grind away at paying off the bankers' debts in euros for the next 10 years, this should remind them that sound money presupposes social order. People will put up with a lot, but if pushed too far strikes, protests and civil disobedience can bring down governments and reverse policy. So maybe Eichengreen is right after all (except for the US...) - democracy and liquidationism don't mix.
And the US is probably less an exception than it appears if we take the Republican success in the mid-terms as a simple expression of voter anger and frustration, rather than an unlikely preference for deflation. So there's going to be more of this.

Interestingly, while in the US the political mood has shifted from expansionary to contractionary responses to the crisis, in the Eurozone it's going the other way around. Maybe because Eurozone governments, who have at least some understanding of what is at stake, have to respond to their electorates for the economic situation, whilst in the US Republicans can win Congress and blame all the problems on the President. The transmission belt of popular anger through to economic policy is working in different ways in the two contexts, telling us something about how democracy conditions policy response.

Lest we forget.... as we contemplate the full force of the crisis bearing down on the weak and vulnerable, all this started because the super-rich all of a sudden needed Big Government. As the FT puts it 'Wall Street Owes its Survival to the Fed'. $3,300 billion's worth of corporate welfare.

Ireland, meanwhile, is paying the price for the decision back in 2008 to guarantee the banks that had made stupid upside bets on property markets that were grossly over-fed by any standard, turning a bank insolvency into a sovereign insolvency.

Funny how over here we seem to have decided it was all Gordon Brown's fault for running a 3.5% budget deficit for a couple of years. Somebody please remind everyone that the banks, not the state, made the wrong bets.

The essential message of what I am now getting used to calling the liquidationists is just that - the world got over-leveraged, and the recession (in other words, the fact we're working and producing less) is the logical result. In other words, the logical result of getting too much into debt is to work and produce less.

This point is brilliantly made by Karl Smith (via Brad DeLong). Sure, it is not so simple: too much debt makes investment problematic and dampens consumption leading to a decline in output, so there is a reason why a burst bubble results in a downturn. But the basic point remains: this downturn amounts to getting people to work less in order to pay off their debts, and government needs to act to get us out of this individually rational but collectively bone-headed scenario.

Having a decent-sized public sector is one way - it didn't stop Sweden posting record growth last quarter. Stimulus is another. And yes, there are fiscal sustainability issues in some countries, but they could in principle be dealt with through international cooperation. After all, markets need some government debt to invest in, and global bond yields are at historically unprecedented lows. This could be done with the right institutions.

Something tells me the ECB, the Fed and the Bank of England aren't the right institutions.

These Wikileaks cables are really producing some big surprises. First we learn that Berlusconi is 'feckless', that Ahmadinejad is a lunatic, and now that George Osborne is a lightweight. What's next? Gordon Brown has poor social skills? Tony Blair was not really a socialist?